Question

A company purchased a new pizza oven for $12,676. It will work for 5 years and has no salvage value. The tax rate is 41%, and annual revenues are constant at $7,192. For financial reporting, the straight-line depreciation method is used, but for tax purposes depreciation is 35% of original cost in years 1 and 2 and the remaining 30% in Year 3. For this question ignore all expenses other than depreciation. What is the tax payable for year one?

A. $2,535 $3,169
B. $4,657 $2,748
C. $2,748 $2,535

Answer 1

straight line depreciation rate = $12,676 / 5 = $2,535.20

financial reporting income = $7,192 - $2,535.20 = $4,657 x 41% = $1,909

Accelerated depreciation = $12,676 x 35% = $4,437

taxable income = $7,192 - $4,437 = $2,755 x 41% = $1,130

tax expense for year 1 = $1,130

deferred tax liability for year 1 = $1,909 - $1,130 = $779

financial reporting income = $4,657

taxable income = $2,755